Appeal in the EAT: Insolvency, collective consultation, special circumstances and the protective award

The TLT employment team recently represented Keeping Kids Company (in compulsory liquidation) in an appeal to the Employment Appeal Tribunal (EAT) in the case of Keeping Kids Company (in compulsory liquidation) v Smith and ors.

The decision confirms that once an employer has a clear intention to make redundancies the obligation to collectively consult is triggered. This is so even if, at that point in time, the intention is provisional. Collective consultation is an ongoing process during which further information can be revealed as it becomes known.

The EAT also confirmed that a sudden disaster affecting the employer that occurs after the obligation to collectively consult has already been triggered is no defence to compliance with that obligation. However, such events are relevant to the assessment of the appropriate level of the protective award for failure to consult.

The appeal considered three interesting issues: when the obligation to collectively consult arises in an insolvency situation, the special circumstances defence in a claim for failure to collectively consult in a redundancy situation, and the mitigating circumstances that can lead to a reduction in the 90 day protective award.

Background

Kids Company was a high profile charity which assisted thousands of marginalised and disadvantaged children.

In 2015, the company experienced financial difficulties which led to it requesting emergency funding from the government. The request was submitted in June 2015. As part of its request, Kids Company submitted a business plan confirming that it was proposing to dismiss as redundant 20 or more employees in September 2015 and intended to go through collective consultation to effect those redundancies. How many redundancies were to be made and how the final plan was to be formulated was dependent upon the grant coming through from the government.

On 29 July 2015, the government funding was granted. It was made conditional on the process detailed in the Kids Company's business plan starting straight away. However, the following day the Metropolitan Police announced that it was investigating allegations of safeguarding issues at the charity. This led to the government immediately withdrawing its funding and meant that additional funding from donors was no longer forthcoming. As a result, Kids Company could not function and had to dismiss all of its employees for redundancy early in August 2015. There was no consultation prior to the dismissals.

Tribunal decision

Claims were brought for failure to collectively consult. At tribunal level, the majority upheld the claims and awarded a full protective award of 90 days' pay.

It was held that there was a proposal to dismiss in June 2015 when the request for funding and business plan was submitted to the government. The majority held that Kids Company should have begun collectively consulting "promptly" after the June 2015 proposal to dismiss.

The majority were not convinced by arguments that the Metropolitan Police investigation amounted to a special circumstances defence or that the protective awards should be reduced due to the police investigation being a mitigating factor.

However, the judge, in the minority, found that Kids Company could not have known which employees would be dismissed until the point at which the funding came through at the end of July 2015. As such, in his view, the obligation to collectively consult did not arise until then. In addition, he was of the view that the Metropolitan Police investigation did amount to a special circumstance such that the defence was made out.

Kids Company appealed to the EAT.

EAT decision

The main issues were:

Was the obligation to collectively consult triggered in June 2015?

It was argued that the tribunal majority had confused the redundancies which were intended to be made in September 2015 (as set out in the June 2015 business plan) with the redundancies which in fact took place in August 2015. Further, meaningful consultation could not have taken place in June 2015 as the names of those to be made redundant were not known at that time. Finally, consultation could not begin until the government funding had been received, after which the restructuring process could begin.

This ground of appeal was rejected by the EAT. It found that the tribunal majority were entitled to find that in June 2015 there was a proposal to dismiss that might affect any or all employees. This was on the basis that the business plan provided for either immediate insolvency or large-scale redundancies, which inevitably had the potential to affect all employees.

The tribunal majority had not confused the proposed September 2015 redundancies with those which actually took place in August 2015. They were entitled to find that the August 2015 redundancies fell within the June 2015 proposal to dismiss – there was nothing in the June 2015 business plan which guaranteed against earlier dismissals.

The EAT held that consultation can begin even where the intention to dismiss, whilst clear, is provisional. The relevant legislation provides for an ongoing process of consultation during which additional information can become available.

The EAT also found that the tribunal's reference to consultation beginning "promptly" did not mean immediately. The reference to "promptly" was down to the tribunal assessing what was needed to allow meaningful consultation to take place. For consultation to be meaningful in these circumstances "in good time" (as required by the legislation) meant "promptly" and this was a permissible conclusion of the tribunal majority.

Were there special circumstances meaning that the obligation to collectively consult did not apply?

It was argued that the application for government funding was a special circumstance. It was also argued that the Metropolitan Police investigation was a "sudden disaster", which led to the withdrawal of the government and investor funding. This prevented Kids Company from carrying out the planned collective consultation and meant that the redundancy dismissals had to be made sooner (than September 2015) and affected all staff. As such, the police investigation amounted to a special circumstance and was a defence to the claims for failure to collectively consult.

This was rejected by the EAT. The outstanding government funding could not be a special circumstance as the ET majority had already permissibly found that it was not a reason to delay consultation – sufficient information was already known for consultation to begin.

As the EAT found no error in the tribunal majority's decision that there was a proposal to dismiss in June 2015, the police investigation on 30 July 2015 could not be a special circumstance as the obligation to collectively consult had already arisen before the "sudden disaster" occurred.

Alternatively, if there were no special circumstances were there mitigating circumstances meaning that the protective award should be reduced down from 90 days?

It was argued that Kids Company had genuinely intended to consult in good time (and within the statutory minimum of 45 days) before the proposed dismissals were to take place in September 2015. The June 2015 business plan set this out. There was no deliberate attempt to circumvent the statutory requirement to collectively consult. The "sudden disaster" meant that it was not possible to comply with the obligation to collectively consult. As such, the protective award should have been reduced.

The EAT upheld this point of appeal on the basis that although the "sudden disaster" on 30 July 2015 did not amount to a special circumstance, it was relevant to Kids Company's ability to carry out further collective consultation beyond that date. As a result, the EAT found that it was hard to see any sensible basis on which to conclude that there was any continuing obligation to consult after 30 July 2015. As such, the "intervening event" was clearly relevant to the assessment of the protective award.

The EAT remitted this point to the tribunal to determine the correct protective award.

We are able to provide specialist employment law advice in insolvency / administration situations as well as advice on associated redundancies and TUPE considerations. Please contact Stuart McBride, Head of Employment, on 0333 006 0329 or stuart.mcbride@tltsolicitors.com or your usual contact in the employment team who will be happy to help. For more general insolvency advice please contact James Forsyth, Partner in Banking & Restructuring, on 0333 006 0145 or james.forsyth@tltsolicitors.com.

Contributor: Amy Whiting

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.